I have a confession to make: I love monopolies. My portfolio is lousy with them. I have pharms that monopolize the sale of certain drugs--with the government's backing, I might add. I have software companies with market share in certain market segments that comes close to Microsoft's share of PC OSes. I have food companies with such strong brand names and supply muscle that they take over 70% or more of a supermarket section (you ever try to find potato chips that are not made by Frito-Lay?). In fact, if I didn't think the DOJ had such a strong case, I would buy me some MSFT now. Give me a boatload of monopolies and I wouldn't have to drag myself through another 10Q again. I'd be on down-town Eee-zeee Street.A Fool loves a monopoly too. In fact, I would say it was the way TMF explained how to translate the intangible concept of monopoly power into real numbers and tangible attributes that attracted me to this web site in the first place. Monopolies are the only game in town. You are either currently a monopoly, or you are trying to build a monopoly. Rule Makers are current monopolies; Rule Breakers are monopolies in training. Everyone else is simply a lousy investment.Let me run through some of the major Rule Maker and Rule Breaker principles and make a brief connection with the concept of monopoly power.Rule Maker--Dominant brand A brand is a form of monopoly. Coca-Cola has a monopoly on "Coca-Colas". Until recently, they also argued they had a monopoly on "Colas." Trademark protection is one of the legal monopolies in this country.--Gross margins at least 50% High margins are the hallmark of monopoly power. When no one else is making Claritin (made by one of my companies), you can charge high prices. Competition drives down prices, drives down margins. I leave it at that; it's ABC economics.--Net profit margins of 7% or greater Ditto on the high margins.--Flow Ratio below 1.25 A flow ratio is essentially the ratio between what you owe others and what others owe you . If you can get others to pay you on time while making them wait for you past the bill's due date, that's an indication of monopoly power over your customers or your suppliers.Rule Breaker--Top dog and first-mover in an emerging, important industry The ultimate top dog is a pure monopoly. The point of being first mover is to lead the race in establishing the monopoly for the industry.--Sustainable advantage, gained through business momentum, patents, visionary leadership, or incompetent competitors. Sustainable advantage is the vaunted Buffett "economic moat." It means other competitors can't get at you, which is the method for establishing a monopoly. Patents are another form of a government-sponsored monopoly.--The greater the consumer brand, the better. Once again, ditto brands and trademarks.--A recent constituent of the financial media has recently called the company "grossly overvalued." Overvaluation by common standards is another hallmark of a monopoly. Common valuation standards are devised for run-of-the-mill companies with average competitive power. Overvaluation is reserved for companies with monopoly power.Now don't get the impression that I am attacking TMF. Everything I know about investing, I learned from the Gardner brothers and their excellent staff, and I use their monopoly-building criteria every day when evaluating investment opportunities. For example, I am currently evaluating Palm Inc., and the biggest question--the only question--is how well they will be able to build a sustainable monopoly in handhelds, where Microsoft is the least of their competitors (I'm far more concerned with the cell phone and pager makers, like Nokia and Motorola, and the Linux-based machine Samsung is working on). I sincerely love monopolies, and apparently, so does the government. Patents, trademarks, copyrights, and all those law-related thingamajigs that Rob Landley just did an outstanding job describing last week are all legal monopolies protected by the Constitution in the name of fostering economic growth. The anti-Softies have made the point all along that monopolies are legal in this country, and the DoJ proposal leaves the various Microsoft monopolies intact.So if me and the Fool love monopolies so much, where do I part company with the hard-core Microsoft-style monopolist? We have a tradition in this country, exemplified by Thomas Jefferson, that says every generation of Americans should start over. Everyone should be a self-made person. Jefferson did not believe in inheritance (apparently, neither do Buffett or Gates), and he thought that we should have an American Revolution of sorts every 19 years. Monopolies are the natural endgame of capitalism. It is unreasonable to think a competitive balance can exist forever and in all markets. After all, people win wars, people win basketball games, and it is reasonable to think people will also win markets. Jefferson was no opposed to winners; he was opposed to taking the winnings of one generation to dominate the next. This is the principle of hereditary rule: Because my family kicked butt in the past, I have the right to be king in the present. Monopolies are like hereditary rule. Companies that win markets in free and fair competition in the past establish monopolies. For the sake of argument, I'll plea nolo contendere (as if there wasn't enough legal mumbo-jumbo on this board) on the question of whether Microsoft won its monopoly in free and fair competition, but what I do have to ask is what their victory entitles them to under the American system. Patents, trademarks, and copyrights all have sundown clauses. Sundowns express Jefferson's belief that past advantages should not default into the future. The question is whether we have reached Microsoft's sundown.I do not believe we have reached the end of the Microsoft generation yet. They have had their monopoly run for less than 19 years, and the argument can be made that they have not wrung their just deserts out of it yet. If they decide to milk the Windows monopoly for another 10 years, I don't think we should have a problem with that. Microsoft's transgression is not in trying to extend its monopoly in time; they erred in trying to extend their monopoly in space. By trying to leverage their Windows monopoly into different markets, such as applications, the internet, and handhelds, Microsoft tried to extend its hereditary rule sideways. They used their legal Windows monopoly to extend itself in the present across more markets than they had won through free competition. In doing so, they ran afoul US anti-trust legislation, which holds legal monopolies to a higher standard of conduct, and they ran afoul the tradition of Jeffersonian America, which suggests that they should compete anew on level ground in every market they choose to enter. They should have to compete just like the "heirs" of Warren Buffett will have to be ground-zero entreprenuers down in the ditches with everyone else.I admit I have a visceral revulsion for Microsoft, especially its brutal-minded leadership, but I honestly don't have anything against the employees and investors. I'm an investor myself, and the goal of investors and entreprenuers is to build as unassailable a monopoly as possible. When the government stands in the way of that goal, it feels galling, but I think we have to understand that the government has responsibilities beyond what an investor and entreprenuer feels. Monopolies are the natural endgame of competitive capitalism; when monopolies occur, competition dies and markets stagnate. This was the insight of Jefferson and the founding fathers: tyranny is the natural endgame of competitive democracy; when tyranny occurs, democracy dies and an entire people stagnate. That is the reason the government holds periodic elections and polices other checks against the establishment of hereditary power. Right now, Microsoft is feeling the effects of our government's anti-tyranny bias. For the sake of our polity, I think it is right and proper, and totally consonant with the best in the American traditions of free enterprise, that our government demands Microsoft lives up to the responsibilities of its monopoly privileges. Enjoy your monopoly now and enrich yourself, but do not demand that you be allowed to leverage it wherever you please.So ask me again whether I still love a monopoly, and whether I would buy MSFT if I didn't think the DoJ had such a strong case? You betcha! Down-town Eee-zeee Street here I come!
Montashigi wrote:Dominant brand A brand is a form of monopoly. Coca-Cola has a monopoly on "Coca-Colas". Until recently, they also argued they had a monopoly on "Colas." Trademark protection is one of the legal monopolies in this country.I have food companies with such strong brand names and supply muscle that they take over 70% or more of a supermarket section (you ever try to find potato chips that are not made by Frito-Lay?). You shouldn`t confuse a monopoly with a dominant market position.Coca-Cola DOES NOT have a monopoly.It merely has a big market share. And a strong brand.Also, I haven`t yet heard of Coke forcing stores to take, say Pepsi, or apple-juice or whatever off its shelves.It`s got lot`s of competition too, since it has to compete with any old beverage on the market, in a market around which there is no big "moat"(Warren Buffet).So, if Coke started to get too expensive or tasted crappy, it would suffer a lot.The same is not true for MS.If the digestive system of 90 % of people would be incompatible with any other beverage than MS, then Coca-Cola would have the same monopoly type market position as MS.
Remember, a monopoly is defined as having the power to fix prices, and/or exclude competition.Monopolies are great. For the monopolists. And anybody they deign to share with. They're bad for everyone else, including both the consumers and those who would have an opportunity to make a living offering competing services/products.
techno51 wrote:"Remember, a monopoly is defined as having the power to fix prices, and/or exclude competition.Monopolies are great. For the monopolists. And anybody they deign to share with. They're bad for everyone else, including both the consumers and those who would have an opportunity to make a living offering competing services/products. "Not necessarily. Remember the criticial point: having the power you describe is okay. *Using* it is the problem. A monopoly that refrains from *using* that power is not necessarily bad for everyone else.
Your post was one of the best-written pieces I have seen on Microsoft and monopolies in general. If everyone practiced the even-handeness that you demonstrated in your post, the world, business and otherwise, would be a better place.Thanks.
I haven't heard of Coke forcing stores to take,say Pepsi, or whatever off their shelves either. I have been on College Campuses where you can't buy any other soft drinks, except Coke products, due to a large endowment. Money talks with a loud voice. I haven't been on too many campuses lately, so this may all have changed.
It is still very true. I recently graduated from Penn State where there were a few "monopolies" in effect. Basically Pepsi and Nike run rampant through Happy Valley.However, on the thought that something like this can be considered an monopoly - it can't. That would mean that every sponsorship equals a monopoly. Now if the reason only Pepsi can be sold at Beaver Stadium is because the soda machines break or have runtime errors - then I would think that Pepsi had installed a monopolistic soda machine on the Beaver Stadium system.
hstak wrote:"It is still very true. I recently graduated from Penn State where there were a few "monopolies" in effect. Basically Pepsi and Nike run rampant through Happy Valley."I graduated PSU in 1997. The "no Coke" situation is a little overplayed there, I think. You don't get Coca-Cola on campus, but there are still Coca-Cola company beverages served in the dining halls, which I think a lot of people failed to notice. Still, I have a cute "Pepsi State" graphic that somebody drew, where the Nittany Lion face is drawn into the blue, red, and white Pepsi logo. :-)"However, on the thought that something like this can be considered an monopoly - it can't. That would mean that every sponsorship equals a monopoly."Right, but for the wrong reason. You can sponsor something without demanding exclusive use of your product. You can't consider it a monopoly unless unreasonable barriers to entry are erected, and it is quite trivial to get Coke products in State College from an off-campus source.Even with the much-maligned Pepsi deal, Pepsi wasn't able to get Coke completely booted off the campus, just a couple specific Coke products. Given my appetite for orange juice and distaste for soda, I daresay I consumed many more Coke products than Pepsi products in the campus dining halls during my four years there. (In case you weren't aware, Minute Maid, the juice brand used on campus, is owned by Coke. So much for exclusive use of Pepsi beverages, eh?)
Re: The Coca-Cola brandThere have been some posts questioning whether Coca-Cola has a monopoly on sodas. My answer is that they don't; they have a monopoly on "Coca-Colas". The point in my original post was not that a strong brand is the equivalent of a monopoly on a generic category of goods, but rather that a trademark or brand is a government-enforced monopoly on the trademarked name itself. In other words, other companies are allowed to sell sodas, but no one else is allowed to sell anything with the "Coca-Cola" name on it. A lot of people are loyal to the Coke name; some people even say they can taste the difference between a Coke and a Pepsi. Therefore, if only one company can sell Cokes, they have a monopoly on that market segment. It becomes even stronger when talking about copyrights. An owner of a copyright has exclusive rights to publish his own work. If an author has a masterpiece and he chooses to keep it in his attic (like JD Salinger was suspected of doing), there is nothing a clamouring public can do.Sure, a trademark grant isn't as lucrative as the monopoly grant to the Postal Service, but it is still a grant of exclusivity. Compare it to patented medicines. No one argues that a patent amounts to a government-granted monopoly. But look at the patent on Claritin: it grants Schering Plough an exclusive right to make a particular formula of allergy medication, but there are others allergy formulas out there, including Allegra and Zyrtec. There are other drug categories, like male impotence meds, where there is currently only one player: Viagra. That makes the Viagra franchise potentially more lucrative than Claritin, but they are equally exclusive, narrowly defined monopolies. Likewise, the trademark on Coca-Cola has to compete with the trademark on Pepsi, niether of which are as dominant as the trademark on Frito-Lay, but each of them still has exclusivity on the rights of the name itself. The importance of the market on "Coca-Colas" is another question, but no one is allowed on that turf.Rob Landley's discussion of trademarks last week includes an explanation of what happens when a trademark deteriorates into common jargon, like Kleenex and Xerox was in danger of. The deterioration of a trademark is like the commodization of a previously patented invention. When a drug patent expires and generics are available, that is when the drug company loses its monopoly on that drug. If "Kleenex" ever falls into the public domain, at which time it will no longer be capitalized, the monopoly on the brand name ends, and along with it the market for customers who are loyal to that brand.That's all I was trying to say. I agree that Coke is not in as strong a position as Windows, but they are both government-enforced monopolies. Anti-piracy laws protect Windows just as much as trademark laws protect Coke. We can see how valuable each brand is in countries where the government does not choose to protect them. Those are countries in which Coke and Windows do not have their monopolies enforced.
hey, why doncha buy a clue?Didn't you see where "ILOVEYOU" cost the world $10 billion? That pimply-faced elementary geek Visual Basic Script didn't touch LINUX or OS/2 systems ... in fact, IT CAN'T.So bring The Wimp (aka Chairman Bill) over here so I can kick his ass all over the street.I'll bet he whines like the DOJ was after him all over again.Wake up and see what self-destructive Fascism you are buying into, Fool.regards,pcwolf
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